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The proper man understands equity, the small man profits

Islamic Finance: Year of index outperformance

By Rushdi Siddiqui Available at: Business Times Malaysia or

“The proper man understands equity, the small man profits.” Confucius.

The year 2011 was the year for (Malaysia) syariah-compliant index outperformance against all conventional developed and emerging market country indicies and almost all frontier countries.

The Islamic finance industry has not talked up the Islamic equity capital market story, as the Islamic debt capital market poster child, ‘Sukuk,’ has become the alter-ego of Islamic finance. But, does that amount to concentration brand and business risk for a US$1 trillion (RM3.15 trillion), where Sukuk are, at best, 20 per cent of Islamic finance?

For example, the continued conversation about the ‘controversy’ surrounding Goldman Sach’s US$2b (RM6.3 billion) Sukuk, structure, proceeds and trading, seems to be a proxy statement about Islamic finance’s welcome mat to market moving institutions.

Equity Conversation

There is an equal and as important conversation that needs to be had on Islamic finance chat groups and social media, and its about equity. The equity conversation is not only closer to the inclusive and public good objectives of Islamic finance, but, more importantly, its transparent and easier to explain to the ‘man on the street’ and ‘sceptical media’ in the elevator ride time frame.

Let’s start the conversation by looking at performance of syariah-compliant indicies and compare them to conventional counterpart indicies for 2011.

Today, we look at syariah-compliant indexes, as it sets up the foundation for the transition to syariah-based indexes. It should be noted there is nothing “Islamic” about syariah-compliant indexes, as most of the underlying companies are not from the Muslim countries.

These compliant companies just happen to pass primary business screens (akin to social-ethical indexes) and financial screens (eliminate companies with high debt, high account receivable (translating sales into earnings), and too much non-operating interest income).
May be such screening is the need of the hour for all investors during external shocks or financial tsunamis of sub-prime credit crisis, sovereign debt crisis, so on.

(Query: What provides a pulse on the health of Islamic finance?

A. syariah compliant indicies.
B. Sukuk Indicies.
C. syariah Based Indexes.
D. Ratings of Islamic banks.
E. Islamic product offerings.
F. Western media coverage.
G. Western institutions entry
H. Anti-syariah movement blogs.)

Some observations from the S&P Developed Country indicies for 2011:

* Syariah-compliant indicies out-performed conventional counterpart indicies in 23 of the 25 developed countries, ex-Portugal (no syariah index)

* Syariah-compliant indicies out-performed conventional counterpart indicies in all the major countries encountering turmoil in 2011: US (positive return), Greece, Spain (positive return), Ireland (positive return), Italy, etc. There were not enough compliant companies for a Portugal syariah-compliant index.

* Syariah-compliant indicies out-performed conventional counter-parts in Germany and France – two countries with large exposure to sovereign debt crisis in Europe

* Syariah-complaint indicies under-performance in resource plays of Australia and Canada, yet out-performed in technology or IT- heavy syariah-compliant Israel Index.

Some observations from the S&P Emerging Market Country indicies:

* Syariah-compliant emerging market country indicies outperformed conventional counterpart indexes in 14 of the 20 countries.

* Syariah-compliant Muslim country indicies outperformed (Turkey, Malaysia, Egypt) in three of the five (Morocco and Indonesia) emerging market countries.

* Syariah-compliant indicies from the BRIC countries outperformed in three (Russia, India and China) of four (Brazil) countries.

* Syariah-compliant indicies from SAMI countries outperformed in three (Turkey (Ankara), Malaysia, and Saudi (classified as frontier country) of the four (Indonesia) countries.

* Syariah-compliant indicies had positive return in Thailand, Malaysia and Philippines, whereas conventional had positive return for only one country – Philippines.
Some observations from the S&P Frontier Country indiciesfor 2011:

* Syariah-compliant indicies out-performed in 16 of the 26 frontier countries. It should be noted that 11 of the countries, including Kazakhstan, did not have a syariah-compliant country due lack of enough companies for an index. Kazakhstan stands out because it has made statements of wanting to be an Islamic finance hub.

* Syariah-compliant indicies from the Muslim countries outperformed better than conventional country indicies in seven of the 13, ex-Kazakhstan, countries. It should be noted that most of the Muslim countries are classified as frontier countries except five countries: Turkey, Malaysia, Morocco, Indonesia and Egypt.

It should be noted that the S&P Malaysia syariah BMI (+3.8 per cent), ahead of S&P Qatar syariah (+3.5 per cent), was the best performing syariah-compliant index from the 18 Muslim countries covered by S&P.

Although, the S&P Malaysia BMI conventional index (at -1.14 per cent) underperformed the syariah-complaint index, it was the second best performing in the Muslim world behind S&P Qatar (+3.34 per cent).

The S&P Malaysia syariah BMI (at +3.8 per cent) outperformed all conventional developed and emerging market S&P country indexes, and only underperformed three conventional country frontier countries: Jamaica (+28 per cent), Panama (+18 per cent), and Namibia (+6 per cent).


One challenging and volatile year, (2011) does not establish a performance pattern for syariah-compliant indexes that are ‘light’ on exposure to the conventional financial sector, typically the largest market capitalisation weighted in almost all countries.

However, it shows that ‘low-debt, non-financial-social/ethical’ way of investing does well when there was an external shock to the financial/capital markets.

The 2011 momentum for syariah- compliant indicies should be the spark for stakeholders of Islamic investing to establish foundation for building out the equity side of Islamic finance.

We need to examine:

* Tex benefits of dividends over interest payments, especially countries wanting to be an Islamic asset management hub. Here the Muslim world, led by syariah-compliant equities, can provide a lesson for the western capital market’s bias on debt and leveraging.

* Delivery and payment for clearing and settlement in certain Muslim markets.

* Increasing the free float of syariah-compliant and syariah-based companies in Muslim countries, plus increasing foreign ownership percentage stakes.

* Consolidation amongst Islamic banks, takaful operators, leasing companies, etc, hence, resulting in large cap and liquid companies with large free float (attributes of prominent western-compliant companies in Islamic funds)

* A robust Islamic equity capital market should result in increased IPOs, via private equity exits, family listings, etc.

The ‘proper man understands (the benefits) of equity.’


Cape Town Radio Station, Cape Town, South Africa

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